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Roth IRA Conversions – a Calm in the “Tax” Storm

June 10, 2021

Have you ever been caught out in a storm? Maybe it was in a boat during a squall, your car during a blizzard, or while enjoying the outdoors when a derecho pops up. Despite the situation, our reactions often include: panicking, evaluating our options, making a snap decision, or even freezing, unable to move. Right now, we are in a “tax” storm. President Biden has proposed numerous new tax laws that could have significant ramifications from an estate, income, and capital gains tax standpoint. Each of these proposals impacts various parts of your financial picture, and there is uncertainty surrounding what Congress will ultimately pass.

These unknowns make it challenging to plan and determine the best tax strategies to utilize. If you take specific actions today, you may find out it was unnecessary, in the near future. If you don’t take action, you may face a significant tax liability that could have been avoided.

A Roth IRA conversion is one strategy that could make sense for you no matter what tax laws Congress approves. Converting to a Roth IRA now will lock in historically low tax rates today. Additionally, reducing the balance of your traditional IRA accounts will decrease your required minimum distributions (“RMDs”) that begin at age 72, which will be taxed as income. Lastly, a conversion to a Roth IRA will lock in a zero percent tax rate (yes O%!) on the Roth funds for the rest of your life, your spouse’s life and for ten years after his/her death.

Locking in low tax rates today, reducing future tax consequences, and paying zero percent taxes on Roth IRAs in the future makes sense in any storm.